323 Exam 1 Cheat Sheet

Topics: Tax, Taxation in the United States, Progressive tax Pages: 7 (4716 words) Published: April 15, 2015
General purpose of taxes is to fund gov’t agencies
Unlike fines/penalties, taxes are not meant to punish or prevent illegal behavior Sin taxes- to discourage behaviors
Tax must be required, imposed by gov’t (federal, state, local) and not tied directly to the benefit received by taxpayer Earmarked tax-assessed for specific purpose, because the pmt made by the taxpayer doesn’t directly relate to specific benefit received by taxpayer Ex. Marge travels to AL where she rents a hotel room and dines at several restaurants. The price she pays for her hotel room and meals includes an additional 2% city surcharge to fund road construction in AL. This is a tax b/c the pmt is required by local gov’t and doesn’t directly relate to specific benefit that Marge receives Tax= Tax Base x Tax Rate

Tax Base- defines what is actually taxed. Tax Rate- level of taxes imposed Flat Tax- single tax applied to entire baseGraduated tax- divided into series of brackets Marginal tax rate = (New Total Tax- Old Total Tax)

(New Taxable Income- Old)
Marginal is the next additional increment of taxable income Average tax rate- taxpayer’s avg level of tax on each dollar of taxable income Total Tax / Taxable Income
Effective tax rate- taxpayer’s avg rate of taxation on each dollar of total income (taxable and nontaxable) Provides better depiction of taxpayer’s burden b/c it depicts the total tax paid as a ratio of the sum of both taxable and nontaxable income Total tax / Total Income

Proportional tax structure (flat tax)- imposes constant tax rate throughout base. Proportional tax = tax base x tax rate Marginal tax rate remains constant, always = average tax rate Progressive tax structure- imposes marginal tax rate as the tax base increases, marginal tax rate and taxes paid increases. Regressive tax structure- decreasing marginal tax rate. Ex. SS and unemployment taxes As tax base increases, marginal tax rate decreases while total taxes paid increases

Federal Taxes
Income tax- most significant tax, represents 60% of US tax revenue Levied on individuals, corps, estates, trusts
Employment/Unemployment taxes
Second largest group. Consists of old age, survivors, and disability insurance (OASDI) tax, AKA Social Security tax and Medical Health Insurance tax (medicare) Unemployment taxes fund temp unemployment benefits

Excise tax
Levied on quantity of products sold
Transfer tax
Levied on fair market values of wealth transfers upon death or by gift

State and Local Taxes
Sales and use tax
Tax base for sales tax is retail sales of goods and some services Tax base for use tax is retail price of goods owned, possessed, or consumed w/m state that were not purchased w/n state Property tax

Are ad valorem taxes (tax base for each is fair market value of property) Real property taxes consist of taxes on land, structures, improvements permanently attached to land Personal property taxes include taxes on all other types of property, intangible and tangible Income tax

Most state taxable income calcs largely conform to the federal taxable income calcs Excise tax- states typically impose excise taxes on items subject to federal excise tax Implicit tax- (above taxes are all explicit). Implicit are not directly paid to gov’t. The reduced before tax return that a tax-favored asset produces b/c of its tax advantaged status. Tax-favored: when the income the asset produces is either excluded from tax base or subject to lower rate. Tax benefits associated with tax-favored asset increase demand for asset Evaluating Taxes- Sufficiency

Involves assessing the aggregate size of the tax revs that must be generated and ensuring that the tax system provides these revenues Static forecasting ignores how taxpayers may alter their activities in response to a proposed tax law change and bases projected tax revenues on existing state of transactions Dynamic forecasting attempts to account for possible taxpayer responses to a proposed...
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